Abstract

Stabilizing atmospheric concentrations of greenhouse gases at double their pre-industrial levels (or lower) will require emission reductions far in excess of what can be achieved with current or projected levels of technology at a politically acceptable cost. Substantial technological innovation is required if the nations of the world are to come anywhere close to proposed emission reduction targets. Neither traditional federal support for research and development of new technologies nor traditional command-and-control regulations are likely to spur sufficient innovation. Technology inducement prizes, on the other hand, have the potential to incentivize and accelerate the rate of technological innovation in the energy sector. This paper outlines the theory behind the use of inducement prizes to encourage and direct inventive efforts and technological innovation and identifies several comparative advantages inducement prizes have over traditional grants and subsidies for encouraging the invention and development of climate-friendly technologies. While no policy measure guarantees technological innovation, greater reliance on inducement prizes would increase the likelihood of developing and deploying needed technologies in time to alter the world’s climate future. Whatever their faults in other contexts, prizes are particularly well suited to the climate policy challenge.